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Unilever Nigeria Plc Q2 20 - Outlook remains bleak, despite positive surprise in sales

• Unilever Nigeria’s H1 20 result revealed a 36% YoY decline in sales with an operating loss of N1.4 billion. Albeit, mild support from finance income reduced the H1 2020 after-tax loss to N519.1 million. While for Q2, the company reported a loss of N1.6 billion. Akin to Q1, the company’s performance continues to reflect elevated cost amidst declining revenue. Nonetheless, the reported loss was lower than  our expectation hinged on better outturn in sales.
• Better than expected outturn in sales: Over Q2 20, revenue declined by 40.1% to N14.0 billion hinged on a descent in both the food and personal care sales. Relative to the prior quarter, sales was up by 5.1% and exceeded our expectation by 10%. Though, we highlighted the QoQ sales improvement over Q1, we resisted to urge to revise our numbers hinged on 1.) expected impact of the lockdown on its non-essential product portfolio and 2.) the company never communicated any clear-cut strategy to drive sales since it began its credit tightening. While the competitive environment and suppressed income limits the prospect of a significant increase in price across the industry, we have made upward adjustment to FY 20 sales by 13% to N51.5 billion, reflecting the better than anticipated outturn over H1 and gradual improvement in economic activities over H2.
• Over Q2 20, cost declined at a slower pace relative to sales (- 29.2% YoY to N11.3 billion), translating to a gross profit of N2.73 billion and contraction in gross margin to 19.5% (Q2 19: 31.92%). We have left our cost estimates unchanged reflecting the technical devaluation which occurred in March as well as reduced FX supply to support importation of raw materials as highlighted by management. Therefore, we expect the input cost pressure to remain. This, coupled with elevated operating expense, is expected to push the company’s  FY 20 operating loss to N7.2 billion.
• Elsewhere, the company reported positive cash flow from operations, printing at N9.3 billion from a negative position reported as at FY19, due to a reduction in trade receivables and inventory. Unilever continues to sit on a very high cash balance of N44.6 billion (FY 19: N40.1 billion). While there hasn’t been any communication to the use of cash, finance income generated in the interim will help in reducing the company’s FY loss position.

Overall, while we expect improved sales relative to H1, input cost pressure coupled with elevated operating cost dims the company’s outlook for this year. Our adjustment translates to an uptick in FVE to N13.05 (previously:12.71), however we maintain our NEUTRAL rating. Relative to the last closing price the stock trades closely to its fundamental value with just 1.5% upside.

Q2 20 opex rose by 37% QoQ but was flat YoY